Division A makes a part with the following characteristics: Division B, another division of the same company, would like to purchase16,100 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $19 each.Suppose that Division A is operating at capacity and can sell all of its output to outside customers at itsusual selling price. If Division A agrees to sell the parts to Division B at $19 per unit, the company as a whole will be:
A) better off by $64&.
B) worse off by $128&.
C) worse off by $64&.
D) There will be no change in the status of the company as a whole.

Question

Division A makes a part with the following characteristics:  Division B, another division of the same company, would like to purchase16,100 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $19 each.Suppose that Division A is operating at capacity and can sell all of its output to outside customers at itsusual selling price. If Division A agrees to sell the parts to Division B at $19 per unit, the company as a whole will be:
A) better off by $64&. 
B) worse off by $128&. 
C) worse off by $64&. 
D) There will be no change in the status of the company as a whole.

Quizplus · Accepted Answer

If Division A sells the parts to Division B at $19 per unit, it will lose its usual selling price in the outside market, resulting in a loss of $64 per unit ($83 - $19). Therefore, the company as a whole will be worse off by $64 x 16,100 = $1,030,400.

Division a Makes a Part with the Following Characteristics